Edited version of private advice

Authorisation Number: 1051844632723

Date of advice: 8 June 2021

Ruling

Subject: Genuine redundancy payment

Question

Are prior periods of employment with related entities to be taken into consideration in determining the 'years of service' in respect of the tax-free part of a genuine redundancy payment?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You commenced employment with an employer (the Previous Employer) more than X years ago.

Your employment with the Previous Employer ended more than X years ago.

A short time after, you joined a new employer (the Employer).

You were advised by the Employer that your role was redundant.

In the 20XX-XX income year your employment was terminated.

In an email, the Employer advised that they did not have any documentation in relation to your prior employment with the Previous Employer.

In the 20XX-XX income year, you received a genuine redundancy payment from the Employer.

The Employer used the date that you started employment with the Employer when working out your severance payment entitlements.

You are less than XX years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-175

Income Tax Assessment Act 1997 subsection 83-175(1)

Income Tax Assessment Act 1997 subsection 83-175(2)

Income Tax Assessment Act 1997 subsection 83-175(3)

Reasons for decision

Summary

As the calculation for the tax-free amount of a GRP includes the years of service that are recognised by the Employer, your prior period of employment is not included in the calculation.

Detailed reasoning

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions set out in section 83-175 of the ITAA 1997.

In this instance, the facts show that the severance payment made to you is a GRP.

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment.

The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 20XX-XX income year:

Base amount means $X;

Service amount means $X; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

The Commissioner of Taxation (the Commissioner) has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payment (TR 2009/2),which outlines the relevant requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

Relevantly, paragraphs 69 and 70 state:

69. The extent to which the payment is tax-free will depend on the amount of the payment and the total number of whole years of employment to which the payment relates. There is no requirement for the years of service to be continuous when applying the threshold in section 83-170.

70. If earlier years of service with a previous employer are carried over and acknowledged on commencement with a new employer that later makes a redundancy payment to an employee, those years of service can be included in working out the tax-free amount of the genuine redundancy payment.

In this instance, the Employer has not carried over or acknowledged the years that you worked for the Previous Employer. Consequently, they are not included in calculating your years if service for the purposes of working out the tax-free amount of your payment.